Practical and Helpful Tips: Returns

Reducing Your Capital Gains Tax

Aside from paying income tax and payroll tax, individuals who buy and sell personal and investment assets should also deal with the capital gains tax system. Capital gain rates can be about as much as regular income taxes. The good news is there are ways to keep them as low as possible.

Below are helpful tips for minimizing your capital gains tax:

Wait at least one year before selling.

To qualify capital gains for long-term status (and a tax rate cut), wait until a calendar year has passed before you sell your property. Depending on your tax rate, you may save from 10% to 20%. If you sell stock with a $2,000 capital gain, for instance, and you are in the 28% income tax bracket and have owned the stock for longer than a year, you need to pay 15% on the transaction. If you’ve held the stock for shorter than one year, you’ll pay 28% of $2,000, which is $560, on the transaction.

Sell when you’re earning low income.

Your income level affects the amount of long-term capital gains tax you are obliged to pay. Taxpayers within the 10% and 15% brackets don’t even have to pay long-term capital gains tax at all. If your income level is going down -your spouse is about to go jobless, for example, or you’re almost retiring – sell during a low income year to reduce your capital gains tax rate.

Bring down your taxable income.

As your capital gain tax rate depends on your taxable income, general tax-savings methods can help you grab a nice rate. Maximize your deductions, for example, by completing expensive medical procedures before yearend, donating to charity, or maximizing your traditional IRA or 401k contributions.

Look as well for not-so-known deductions, like the moving expense deduction, which is for those who need to move for employment. Pick bonds issued by states, local governments, or municipalities – whose income is non-taxable – over corporate bonds. There’s a whole range of potential tax breaks out there, so refer to the IRS’s Credits & Deductions database to know what you may qualify for.

When possible, sync your capital losses with your capital gains.

One prominent feature of capital gains is that they’re lessened by any capital losses you incur on a certain year. To lower your tax, use up your capital losses in the years you have capital gains. There’s no restriction on how much in capital gains you should report, but you can only take $3,000 of net capital losses for every tax year. You can, however, carry extra capital losses into future tax years, but if you’ve had a particularly substantial loss, it may take a while for you to use those up.

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